Heading Into Earnings, Is Tyson Ready to Fly?

Friday, Jan. 31 will be a big day for shareholders of Tyson Foods (NYSE: TSN) . With a market cap of $11.9 billion, Tyson is one of the largest producers and distributors of food in the world. However, with earnings due to be reported on Friday for the company's first quarter of 2014, will shareholders see Tyson get just a little bit bigger?

Mr. Market's expectations point toward growth!For the quarter, analysts anticipate that revenue will come in at approximately $8.8 billion. If accurate, this will represent a 4.3% rise compared to the $8.4 billion that management reported in the first quarter of 2013. Such an increase in revenue would start the company off in the right direction toward achieving the $35.7 billion in sales for 2014 that Mr. Market estimates.

On an earnings-per-share basis, Mr. Market believes the company's results will be even stronger. For the quarter, earnings are expected to come in at $0.65, a whopping 35.4% jump compared to the $0.48 the company reported in the same quarter a year earlier.

If Tyson does achieve this increase in earnings, the disparity between the company's top and bottom lines may be attributed, in part, to an improvement in cost containment but would most likely stem from a reduction in shares outstanding. Over the past three years, management has repurchased 7% of the company's shares outstanding as it becomes more optimistic about the business' future.

Tyson's past has been mediocreOver the past three years, Tyson has experienced a modest amount of growth. Between 2011 and 2013, revenue rose 6.5% from approximately $32.3 billion to about $34.4 billion. According to the company's most recent annual report, the sales increase was led by an aggregate increase in sales price of $4.3 billion. This was, however, offset by an aggregate sales volume decline of nearly $2 billion.

Based on this data alone, we can see that the company is improving its sales but doing so by means of rising costs and fewer customers and/or lower sales per customer. Although it's nice to be able to charge more for your product, a corresponding falloff in sales volume implies that the company could be affected by competitors like Kraft Foods (NASDAQ: KRFT) or Pilgrim's Pride (NASDAQ: PPC) .

In terms of profitability, Tyson saw a modest improvement over time. Between 2011 and 2013, the company's net income rose 3.7% from $750 million to $778 million. As opposed to the company's cost structure improving over time, its situation has stayed relatively the same from an operational perspective. However, lower level entries on the income statement like reduced interest expense, higher losses from discontinued operations, and higher taxes as a percent of sales are mostly responsible for slow net income growth.

But how can Tyson stand up against its peers?Tyson's recent operating history hasn't been terribly impressive. The company's revenue has risen at a reasonable rate, but its net income has lagged its top-line growth. But is this typical of companies in its industry, or is Tyson just remarkably unremarkable? To answer this question, we need only look at some of its peers.

Over the past three fiscal years, Kraft's revenue rose just 3% from $17.8 billion to $18.3 billion. In its annual report, the company cites the same problems facing Tyson; lower sales volume offset by rising prices on goods it sells.

Looking at net income, the situation facing Kraft has been even worse. Over this period, the company saw a 53.5% reduction in its bottom line from $3.5 billion to $1.6 billion. At first glance, this looks disastrous, but when you consider that its bottom line in 2010 consisted of a $1.6 billion gain from discontinued operations, the adjusted net income of about $1.9 billion implies that profitability only fell 13.1%.

The primary drivers behind Kraft's net income decline after adjusting for the discontinued operations involved its cost of goods sold and impairment charges rising from 66.2% of sales and zero percent of sales, respectively, to 68.2% and 0.8%, respectively. However, it should be noted that the company did see its selling, general, and administrative expenses fall from 17.2% of sales to 16.5%.

As opposed to Tyson and Kraft, Pilgrim's Pride is a different story. Over its three most recent fiscal years, the company saw its revenue rise an impressive 18% from approximately $6.9 billion to $8.1 billion. Just as in the case of its peers, Pilgrim's Pride saw sales volume decline but prices rise in the United States. However, the company benefited from a 15.2% jump in sales in Mexico driven by both higher prices and higher volume.

This revenue increase helped contribute to a 100% rise in net income, from $87.1 million to $174.2 million between 2010 and 2012. Besides seeing an increase in revenue, the company benefited from a $57.6 million reduction in impairments over this period, which had previously held its profitability down.

Foolish takeawayTyson is a company that has generated reasonable revenue growth but mediocre net income improvement. In the event that the slower revenue growth was being driven by inefficiencies in its operations, that would be a negative indicator for the company, but the reason behind lower profitability can be chalked up to lower items on the income statement.

As an alternative to Tyson, shareholders could jump into shares of Kraft, but its situation appears worse than Tyson's. Another alternative would be shares of Pilgrim's Pride, which have fared well between 2010 and 2012, but the downside here is that the company's fundamentals have jumped around quite a bit. It is true that the company's cost structure has been improving lately, but two of the past four years yielded a net loss.

Moving forward, it's difficult to decide what to do with Tyson. For a long-term investor, the stock will likely fare well, but it's not something that shareholders can expect to double their money every couple of years. Rather, it's more likely to be a slow and steady riser over time, which isn't always bad.

Tyson operates in an industry that can't ever die because we all need food. However, is the company one that shareholders should own forever or is there something better out there for you? As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love.

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